Translating Good Intentions Into Actions

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By Kristen Berman, Wendy De La Rosa and Dan Ariely – Common Cents Lab, Duke University

According to recent research, 57 percent of American adults say they are struggling financially. Considering how powerfully financial well-being—or lack thereof—affects every other area of a person’s life, reducing this percentage should be an urgent priority. To put the matter into context, policymakers now devote great attention to the obesity epidemic, and obesity, while undoubtedly a serious issue, affects far fewer Americans (30 percent) than financial stress does.

Many organizations have tried to address financial health by investing in financial education programs. According to the Consumer Financial Protection Bureau, the United States spent more than $670 million in 2013 on financial education programs. The hope is that by teaching Americans the importance of savings, and how to save, Americans will in fact save.

However, recent research suggests that financial education alone is ineffective. Common Cents Lab recently surveyed almost 1,000 low- to middle-income Americans. When asked what they could do to increase their financial assets, survey respondents listed, on average, four specific steps they could take—and the steps they listed were very good ones.

This suggests that people have a clear idea what they need to do to improve their financial situation. Yet, 36 percent of these same people had less than $500 in savings. Why is it that despite knowing what they should do, people are not financially secure?

“But the reality is that we live in the moment and we make myopic decisions without thinking much about the big picture or the long term.”

Dan Ariely

“The gap between what people want and what they do is described by social scientists as the ‘intention-action’ gap,” says Dan Ariely, professor and co-founder of the new Common Cents Lab at Duke University. “We know that we are supposed to think about all the things we want to spend on as ‘now’ versus ‘later.’ But the reality is that we live in the moment and we make myopic decisions without thinking much about the big picture or the long term. The problem is that thinking about money the right way is really, really hard. So we don’t think about money the right way, and sometimes we just don’t think about the implications of our spending at all.”

The Common Cents Lab, with generous funding from MetLife Foundation, is a three-year initiative aimed at using social science to build and test financial interventions that can help low- to middle-income Americans make better financial decisions. The lab focuses on solutions that address common but avoidable intention-action gap problems: situations where people should be taking cheaper loans, but don’t, or should be borrowing less, but don’t, or should put a little money aside, but don’t.

Reducing barriers to savings by ‘just starting.’

As one of its first projects, Common Cents, in partnership with a company called Retiremap, is building an app that expands access to financial planning expertise for the low- and middle-income market through automation and technology.

Automated financial management services, which typically use algorithms to optimize risk in a financial portfolio, are not new. In fact “robo-advisor” firms raised nearly $300 million in venture funding last year. The behavioral economics perspective that will drive Common Cents’ development, however, is that successful financial management depends less on effective ways to recalibrate portfolios and more on effective ways to build such basic human elements as confidence, trust, self-efficacy and the belief that one can reach the desired goal.

For example, in a three-year randomized experiment in which some parents were given a children’s college savings accounts, the children of those parents showed higher social and cognitive performance. The researchers hypothesize that the parents given college savings accounts changed how they thought about their child’s future. This intervention was not about optimizing the asset allocation decisions, but instead about creating a “college-bound” identity for the children in their parents’ minds.

Automatically opening child savings accounts has another benefit. Much in the way that simply putting on your running shoes and getting out the door overcomes one of the biggest barriers to your jogging habit, just opening a financial account removes a large perceived barrier to saving.

When cities started automatically opening 529 college savings accounts for parents, the average account balance unsurprisingly shot up, doubling in six years to reach an all-time high of $20,474 in 2015, according to The College Savings Plan Network.

These interventions seem simple, but human nature is not. Small barriers do decrease the likelihood of taking action, whether the obstacle in the way of opening an account involves lack of familiarity, complexity or that perennial self-defeating behavior, procrastination. By designing systems that incorporate insights into human behavior, Common Cents Lab aims to bridge the intention-action gap and ultimately to increase America’s bank balances.